prices above a competitive level without losing [their] business.” 42nd Parallel North, 286 F.3d at
405. However, Plaintiffs have not alleged that any of the Defendants possess market power in the
stock options trading market. Therefore, based on the foregoing, Count VI is dismissed for failure
to state a claim.

The Exchange Parties argue that Count HI should be dismissed because (1) there was no
contract between Plaintiffs and the Exchange Parties, (2) it is barred by the doctrine of regulatory
immunity, (3) it fails to allege a breach of an alleged contract, and (4) Plaintiffs do not adequately
allege standing to sue.

“To properly plead a cause of action for breach of contract, a plaintiff must allege (1) the
existence of a valid and enforceable contract; (2) performance by the plaintiff; (3) breach of the
contract by the defendant; and (4) resultant injury to the plaintiff.” Interclaim Holdings Ltd. v. Ness,
Motley, Loadholdt, Richardson & Poole, No. 00 C 7620, 2001 WL 1313799, at *10 (N.D. Il. Oct.
29, 2001).

Count Il alleges that the Exchange Parties, by quoting prices through their electronic transfer
systems, have offered option contracts to Plaintiffs at specified prices; Plaintiffs accepted these offers
by “clicking” on the quoted prices; the Exchange Parties breached these contracts by refusing to
execute the transactions, changing the quoted price when Plaintiffs “clicked” on them, and cancelling
transactions after sending confirmation notices; and Plaintiffs have incurred damages as a result of
the breach. (Am. Compl. ff 40, 41, 42, 43.)

Count III adequately alleges a claim for breach of contract. A price quotation, if sufficiently
detailed, may constitute an offer. See McCarty v. Verson Allsteel Press Co., 89 Ill. App. 34. 498, 506

(1980). Moreover, whether a price quotation constitutes an offer is a question of fact and, therefore,

~13-


accounts and under a power of attorney agreement to trade other accounts since on or before April
2000. Plaintiffs had valid account contracts with various clearing firms which permitted them to
place orders for the purchase and sale of stock options at the Exchange Parties through their
respective electronic trading systems.

The Exchange Parties misrepresented prices and that orders will be executed instantaneously.
The Exchange Parties also refused to execute stock option transactions when Plaintiffs “clicked” on
prices sent via the electronic transfer system, changed the option price quoted when Plaintiffs
“clicked” on them, failed to send instantaneous “receipts” after Plaintiffs “clicked” on them, for
substantial periods of time, and cancelled stock option transactions after confirming such
transactions.

The CBOE circulated a “blacklist” letter to its clearing firms which allegedly falsely accused
Plaintiffs of potential trading abuses. In February 2001, the CBOE attempted to bar Plaintiffs and
others from the Exchange Parties’ marketplaces by imposing severe reporting requirements on their
respective clearing firms. The CBOELA, through Phillips, Mondrus, and Blum, used its influence
with the CBOE to compel the CBOE to draft and deliver the letter to Plaintiffs’ clearing firms. Upon
receipt of the letter, the clearing firms terminated their contracts with Plaintiffs, who are no longer
able to trade stock options.

DISCUSSION

PHLX’s Motion to Dismiss for Improper Venue and Lack of Personal Jurisdiction

PHLX argues that it should be dismissed due to lack of personal jurisdiction and improper
venue.

Venue is proper in an action brought under the Securities Exchange Act of 1934 ifa plaintiff

4.


changed prices when Plaintiffs “clicked” on them, (3) did not send instantaneous confirmation of
sales, and (4) cancelled transactions after sending confirmation. (Am. Compl. { 32.) Count I also
alleges that the Exchange Parties repeatedly misrepresented that orders would be executed
instantaneously. (Am. Compl. { 27.) Count I alleges sufficient facts establishing a motive and an
opportunity to commit fraud, Count I also sufficiently alleges what misrepresentations were made,
by and to whom, and when such misrepresentations were made. In short, Count I alleges facts that
constitute circumstantial evidence of reckless or conscious behavior. See Jn re Advanta Corp. Sec.
Litig., 180 F.3d at 533.

The Exchange Parties also argue that Count I should be dismissed because it does not allege
transaction causation or loss causation. In a securities fraud action under Rule 10(b)(5), Plaintiffs
must plead transaction causation, that is, “that it would not have invested in the instrument if the
defendant had stated truthfully the material facts at the time of the sale”, and loss causation or “that
it was the very facts about which the defendant lied which caused [Plaintiffs’] injuries.” Caremark,
Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir. 1997). As was noted above, Count I
alleges that the Exchange Parties changed prices when Plaintiffs “clicked” on them and
misrepresented price quotations to deprive Plaintiffs of profitable trades on a daily basis. (Am.
Compl. J 25, 26, 32.) These allegations reasonably support the inference that (1) Plaintiffs would
not have invested in the instrument had the Exchange Parties stated truthfully the price of the stock
options and (2) that this change in the price of the stock options caused Plaintiffs’ injuries. See
Caremark, 113 F.3d at 648. Thus, Count I adequately pleads transaction causation and loss
causation; and, therefore, the Exchange Parties’ Motion to Dismiss is denied with respect to Count

L


Therefore, based on the foregoing, PHLX’s Motion to Dismiss Count I is denied.
Exchange Parties’ Rule 12(b)(6) Motion to Dismiss

The Exchange Parties argue that Count I should be dismissed because: (1) Plaintiffs failed
to (1) plead the alleged fraud with the particularity required by 15 U.S.C. § 78u-4(b)(1), (2) and
Federal Rule of Civil Procedure 9(b); (2) Plaintiffs failed to properly allege transaction or loss
causation; (3) any claim about the operation of the Exchange Parties’ markets is barred by the
doctrine of regulatory immunity; (4) Plaintiffs lack standing to assert a claim for purchases they did
not make; and (5) the Exchange Parties’ alleged actions were not manipulative or deceptive.

Section 10(b) of the Securities Exchange Act of 1934 provides that:

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means

or instrumentality of interstate commerce or of the mails, or of any facility of any

national securities exchange . . . [t]o use or employ, in connection with the purchase

or sale of any security registered on a national securities exchange or any security not

so registered, . . . any manipulative or deceptive device or contrivance in

contravention of such rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 provides that:

[i]t shall be unlawful for any person, directly or indirectly, by the use of any means

or instrumentality of interstate commerce, or of the mails or of any facility of any

national securities exchange, (a) [t]o employ any device, scheme, or artifice to

defraud[;] (b) [t]o make any untrue statement of a material fact or to omit to state a

material fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading[;] or (c) [t]o engage in

any act, practice, or course of business which operates or would operate as a fraud

or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (2002).

To plead a claim for securities fraud, Plaintiffs “must allege that the [Exchange Parties]: ‘(1)

made a misstatement or omission, (2) of material fact, (3) with scienter, (4) in connection with the

-6-


can meet the requirements of section 27 of the Act. Section 27 provides in pertinent part that:

[a]ny suit or action to enforce any liability or duty created by this chapter or rules and

regulations thereunder, or to enjoin any violation of such chapter or rules and

regulations, may be brought in any such district [where the act or transaction
violating the Act occurred] or in the district wherein the defendant is found or is an
inhabitant or transacts business, and process in such cases may be served in any other

district in which the defendant is an inhabitant or wherever the defendant may be

found.

15 U.S.C. § 78aa (2002). Section 27 provides for nationwide service of process. This means that
this Court will have personal jurisdiction over PHLX if there is a nexus between PHLX and the
United States. See Fitzsimmons v. Barton, 589 F.2d 330, 332 (7th Cir. 1979). PHLX is located in
Philadelphia, Pennsylvania. Thus, there is a nexus between PHLX and the United States, and this
Court has personal jurisdiction over PHLX.

For venue to be proper, Plaintiffs must allege that (1) an act or transaction violating the Act
occurred in the Northern District of Illinois or (2) PHLX is found or is an inhabitant or transacts
business in the Northern District of Illinois. See § 78aa. Plaintiffs allege that PHLX violated the
Exchange Act by refusing to execute stock option transactions and changing the price when Plaintiffs
“clicked” on them, cancelling transactions after confirming them, and failing to send instantaneous
“receipts” for substantial periods of time after Plaintiffs “clicked” on them. These allegations are
insufficient to show that a “material or important act in furtherance of the violations occurred in this
district.” Czechorski v. Executive Telecard, Ltd., No. 95 C 2388, 1995 WL 549946, at *3 (N.D. Ill.
Sept. 8, 1995). The orders and the alleged misrepresentation by PHLX regarding those orders, i.e.
that “clicking” placed the order at the price displayed on screen, occurred in this district.

The other Exchange Parties do not contest venue. Therefore, any objection to venue in this

district is waived as to those defendants. See Fed.R.Civ.P. 12(h)(1).

5.


The Seventh Circuit has not yet reached the issue of what averments are sufficient to give rise
to a strong inference that the defendant acted with scienter, “a mental state embracing an intent to
deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976). The
Second and Third Circuits have held that “it remains sufficient for plaintiffs [to] plead scienter by
alleging facts ‘establishing a motive and an opportunity to commit fraud, or by setting forth facts that
constitute circumstantial evidence of either reckless or conscious behavior.” In re Advanta Corp.
Sec. Litig., 180 F.3d 525, 533 (3d Cir. 1999) (quoting Weiner v. Quaker Oats Co., 129 F.3d 310, 318
n.8 (3d Cir. 1997)); see also Press v. Chem. Inv. Servs., Corp., 166 F.3d 529, 538 (2d Cir. 1999).
The Sixth and Eleventh Circuits have held that scienter can be alleged “by pleading facts that denote
severe recklessness.” Helwig v. Vencor, Inc., 251 F.3d 540, 550 (6th Cir. 2001); Bryant v. Avado
Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999). In the Ninth Circuit, a plaintiff must plead facts
giving rise to a “strong inference of deliberate recklessness.” In re Silicon Graphics Inc. Sec. Litig.,
183 F.3d 970, 975 (9th Cir. 1999). “[T]his court agrees with the other courts in this District who
have held that the ‘§ 78u-4(b)(2) adopts the Second Circuit standard but declines to bind courts to
the Second Circuit’s interpretation of its standard.” Retsky Family Ltd. P’ship v. Price Waterhouse
LLP, No. 97 C 7694, 1998 WL 774678, at *1 (N.D. Ill. Oct. 21, 1998) (quoting Rehm v. Eagle Fin.
Corp., 954 F. Supp. 1246, 1252 (N.D. Ill. 1997).

Count I alleges that the Exchange Parties “repeatedly misrepresented price quotations to
public customers in order to deprive the Plaintiffs and others similarly situated of profitable trades
... ona daily basis and on thousands of occasions” with specific intent to harm the Plaintiffs by
excluding Plaintiffs from the options marketplace. (Am. Compl. {{] 25, 26.) Count I also alleges that

the Exchange Parties (1) refused to execute transactions when Plaintiffs “clicked” on them, (2)

-8-


22 —seq Minute Grder Form (06/97)

United States District Court, Northern District of Illinois

winte Magistrate Jue John W. Darrah “nan Asied Suge
CASE NUMBER 01 C 7456 DATE 9/4/2002
CASE MICHAEL KUNDRAT vs. THE CHICAGO BOARD OPTIONS EXCHANGE,
TITLE
[In the following box (a) indicate the party filing the motion, e.g. plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
¢)) Oo Filed motion of [ use listing in “Motion” box above.]
(2) ao Brief in support of motion due
(3) o Answer brief to motion due___. Reply to answer briefdue___.
(4) Oo Ruling/Hearingon___—ssetfor_— at
(5) im Status hearing[held/continued to] [set for/re-set for]on__——set for at
(6) Oo Pretrial conference[held/continued to] [set for/re-set for]on__—_—set for at
[e) Oo Trial[set for/re-set for]on__at
(8) o [Bench/Jury trial] [Hearing] held/continued tot
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OFRCP4(m) Local Rule 41.1 OFRCP41(a)(1) OO FRCP41(a)(2).

(10) MM — [Other docketentry] Enter Memorandum Opinion And Order. Defendants’ joint motion to dismiss
is granted in part and denied in part. PHLX’s motion to dismiss counts I and III is denied.

al) ff [For further detail see order attached to the original minute order.]
No notices required, advised in open court,

No notices required.

Notices mailed by judge’s staff.

SEP 06 2002

date docketed

Notified counsel by telephone.

a | Docketing to mail notices.

Mail AO 450 form.

LuAAa Loaiera cea
Copy to judge/magistrate judge. I ES
courtroom
La deputy’s
initials
Date/time received in
central Clerk’s Office



by manipulating their electronic trading systems, cancelling trades, refusing to execute trades and
changing prices for stock option contracts. (Am. Compl. { 37.) Count II further alleges that this
conduct is anti-competitive and that, as a result, Plaintiffs have sustained damages. (Am. Compl. {
38.) Count IV alleges that the Exchange Parties violated section 2(a) by breaching contracts entered.
into with Plaintiffs through their electronic trading systems. However, Counts II and IV do not
allege a second purchaser with whom Plaintiffs were in competition who purchased the stock options
at a different price than Plaintiffs. Moreover, except for a single conclusory statement, Counts Il and
IV do not allege an anti-competitive effect as a result of the Exchange Parties’ alleged conduct.
Therefore, Counts II and IV are dismissed.

The Exchange Parties and Blum argue that Count VI should be dismissed because (1)
Plaintiffs have alleged a conspiracy among entities that do not compete and with whom Plaintiffs
do not compete and (2) Plaintiffs’ exclusion from the marketplace would not preclude sufficient
competition in the options market.

The Sherman Act provides that “[e]very contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign
nations, is hereby declared to be illegal.” 15 U.S.C. § 1 (2002).

Count VIalleges that the CBOELA, through its agents Phillips, Mondrus, and Blum, violated
§ 1 by aiding and encouraging CBOE to draft a letter designed to bar Plaintiffs from the Exchange
Parties’ marketplaces. (Am. Compl. { 62.) Count VIalso alleges that the CBOE, CBOELA, Phillips,
Mondrus, and Blum did this to interfere with Plaintiffs’ contractual relationships, hurt Plaintiffs’
reputations in the stock options community and deter clearing houses and other third parties from

doing business with Plaintiffs and that this conduct is anti-competitive. (Am. Compl. 64, 65, 66.)

-11-


The Exchange Parties argue that Counts II and IV should be dismissed because: (1) stock
options are not “commodities” within the meaning of section 2(a) of the Robinson-Patman Act, 15
U.S.C. § 13(a) (2002); and (2) Counts Il and IV do not allege a prima facie case of violation of
section 2(a) of the Robinson-Patman Act.

Section 2(a) of the Robinson-Patman Act provides that:

[i]t shall be unlawful for any person engaged in commerce, in the course of such

commerce, either directly or indirectly, to discriminate in price between different

purchasers of commodities of like grade and quality, where either or any of the
purchases involved in such discrimination are in commerce . . . and where the effect

of such discrimination may be substantially to lessen competition... .

15 U.S.C. § 13(a). In order to plead a prima facie case of price discrimination under section 2(a),
Plaintiffs must allege (1) at least two sales of commodities (2) by the same seller (3) to different
purchasers (4) at different prices to persons in competition with each other (5) that have an anti-
competitive effect. See Windy City Circulating Co., Inc. v. Charles Levy Circulating Co., 550 F.
Supp. 960, 966 (N.D. Ill. 1982). The term “commodity” as used in section 2(a) is restricted to
tangible goods, such as “wares, merchandise, machinery and supplies” and cannot be a service or
any other intangible good. Baum v. Investors Diversified Servs., Inc., 409 F.2d 872, 875 (7th Cir.
1969).

Stock options are not tangible goods. Rather, they are options to buy stocks at some time in
the future. Because stock options are not tangible goods, they are not commodities. Baum, 409 F.2d
at 875. Therefore, section 2(a) does not apply to any transactions involving stock options.

Even if stock options were commodities and within the ambit of section 2(a), dismissal of
Counts II and IV would still be appropriate because they do not state prima facie cases for price

discrimination under section 2(a). Count II alleges that the Exchange Parties violated section 2(a)

-10-


purchase or sale of securities, (5) upon which [Plaintiffs] relied, and (5) that reliance proximately
caused [Plaintiffs’] injuries.” Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1194 (N.D. Ill. 1997)
(quoting Moss v. HealthCare Compare Corp. (In re HealthCare Compare Corp. Sec. Litig.), 75 F.3d
276, 280 (7th Cir. 1996)). “In connection with the purchase or sale of securities” should be broadly
construed and does not require “a misrepresentation about the value of a particular security in order
to run afoul of the Act.” Sec. Exch. Comm’n v. Zandford, - - U.S. - -, 122 S. Ct. 1899, 1903 (2002).

Pursuant to Rule 9(b), “[iJn all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity.” Fed.R.Civ.P. 9(b) “This means that persons
alleging fraud must state ‘the who, what, when, where, and how.” Boyd Mach. & Repair Co. v. Am.
Int'l Homes, Ltd., 100 F. Supp. 2d 898, 900 (N.D. Ili. 2000) (quoting DiLeo y. Ernst & Young, 901
F.2d 624, 628 (7th Cir. 1990)). “The allegations must be specific enough to provide the defendants
with a general outline of how the alleged fraud scheme operated and of their purported role in the
scheme.” Rohlfing v. Manor Care, Inc., 172 F.R.D. 330, 347 (N.D. Ill. 1997) (citations omitted).

To determine whether Count I is sufficient, a court will bear in mind the purposes of Rule
9(b): “(1) protecting the defendants’ reputations; (2) preventing fishing expeditions; and (3)
providing adequate notice to the defendants.” Rohlfing, 172 F.R.D. at 347 (citing Vicom, Inc. v.
Harbridge Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994)).

The Private Securities Litigation and Reform Act of 1995 (“PSLRA”) imposes even stricter
pleading requirements for scienter in securities fraud cases. 15 U.S.C. § 78u-4(b)(2) (2002). The
PSLRA provides that in securities fraud cases, “the complaint shall, with respect to each act or
omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2).

-7-


At all relevant times, the Exchange Parties were registered as exchanges with the United
States Securities and Exchange Commission (“SEC”). CBOE is located in Chicago, Illinois. AMEX
is located in New York, New York. PHLX is located in Philadelphia, Pennsylvania. PCOS is
located in San Francisco, California. CBOELA is a non-profit volunteer organization made up of
CBOE members. Blum is a member of the management committee of CBOELA.

The Exchange Parties provide a marketplace for the buying and selling of stock options. The
Exchange Parties guarantee performance of the counter-parties to the transactions that take place in
their respective marketplaces.

The Exchange Parties quote stock option prices at which public customers can buy and sell
option contracts. One of the ways they provide these price quotations is through various electronic
transfer systems, These electronic transfer systems route the option price quotations through clearing
firms to public customers via computer. Once the price is displayed, public customers may buy or
sell the option by “clicking” on the price shown onscreen. The Exchange Parties represent to the

public that when a customer “clicks” on the represented price, the transaction is executed
instantaneously. After this instantaneous transaction is completed, the Exchange Parties send a
confirmation notice. This “receipt” allows public customers, especially day traders, the opportunity
to evaluate their positions and to determine when to sell or buy back the stock option. Plaintiffs were
public customers of the Exchange Parties and received price quotations through the electronic
transfer systems. On or before mid-1999 until the present time, Kundrat and Awdisho traded stock
option contracts at the Exchange Parties as independent retail customers through their own trading

accounts and under a power of attorney agreement to trade other accounts. Ryan has traded stock

option contracts at the Exchange Parties as an independent retail customer through his own trading

-3-


not appropriate for consideration on a motion to dismiss. See Rush-Presbyterian St. Luke’s Med. Ctr.
v. Gould, Inc., No. 93 C 1661, 1993 WL 376163, at *2 (N.D. Ill. Sept. 22, 1993).

Furthermore, the Exchange Parties’ argument that the breach of contract claim against them
is barred by the doctrine of regulatory immunity because not all transactions were eligible for
electronic trading under the various Exchanges’ rules or that the Exchanges’ rules permitted
cancelling transactions or changing prices under appropriate circumstances is not persuasive.
“[S]elf-regulatory organizations [such as the Exchange Parties] do not enjoy complete immunity
from suits; it is only when they are acting under the aegis of the Exchange Act’s delegated authority
that they so qualify.” Sparta Surgical Corp. v. Nat'l Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1214
(9th Cir. 1998). At this stage of the proceeding, it is unclear which transactions between Plaintiffs
and the Exchange Parties were ineligible for electronic trading or whether the appropriate
circumstances for cancelling a transaction or changing the price were present. Furthermore, there
has been insufficient factual development to determine whether the Exchange Parties were acting
“under the aegis of the Exchange Act’s delegated authority” when they cancelled trades or changed
prices. Therefore, the Exchange Parties’ motion to dismiss is denied with respect to Count III with
leave to reassert this argument at a later time.

Finally, CBOE, CBOELA and Blum argue that Count V should be dismissed because
regulatory immunity and absolute privilege bar Plaintiffs’ tortious interference claim.

Under Illinois law, the elements ofa tortious interference with contract claim include: (1) the
existence ofa valid and enforceable contractual relationship, (2) the defendant’s knowledge of such
contractual relationship, (3) the defendant’s intentional and unjustified inducement of a breach of

said contractual relationship, (4) the breach by the other party caused by the defendant’s conduct,

“14.


claims for tortious interference (Count V) against CBOE, CBOELA, Phillips, Mondrus, and Blum
and violation of the Clayton Act (Count VI) against all Defendants.

The Exchange Parties and Blum move, pursuant to 15 U.S.C. § 78u-4 and Federal Rules of
Civil Procedure 9(b) and 12(b)(6), to dismiss the amended complaint. PHLX also moves to dismiss
Counts I and ITT pursuant to Federal Rule of Civil Procedure 12(b)(2) and 12(b)(3). For the reasons
set forth below, the Exchange Parties and Blum’s Joint Motion to Dismiss is granted in part and
denied in part. PHLX’s Motion to Dismiss Counts I and II is denied.

LEGAL STANDARD

When considering a motion to dismiss, well-pleaded allegations in the complaint are accepted
as true. Turner/Ozanne v. Hyman/Power, 111 F.3d 1312, 1319 (7th Cir. 1997). Any ambiguities
in the complaint are construed in favor of the plaintiff. Kelly v. Crosfield Catalysts, 135 F.3d 1202,
1205 (7th Cir. 1998). Dismissal is proper only when it appears beyond doubt that Plaintiff can prove
no set of facts to support the allegations in his or her claim. Strasburger v. Board of Education, 143
F.3d 351, 359 (7th Cir. 1998).

“Although the Federal Rules of Civil Procedure do not require a plaintiff ‘to set out in detail
the facts upon which he bases his claim’. . . he must ‘set out sufficient factual matter to outline the
elements of his cause of action or claim, proof of which is essential to his recovery.’” Benson v.
Cady, 761 F.2d 335, 338 (7th Cir. 1985) (citation omitted). A complaint will not avoid dismissal
if it contains “bare legal conclusions” absent facts outlining the basis of the claims. Perkins v.
Silverstein, 939 F.2d 463, 467 (7th Cir. 1991).

BACKGROUND

For purposes of this Motion to Dismiss, the following allegations are taken as true.

-2-


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

MICHAEL KUNDRAT,
STANLEY AWDISHO, and
KEVIN RYAN,

CRETE

Hon. John W. Darrah SEP 06 2002

Case No. 01 C 7456
Plaintiffs,

Vv.

THE CHICAGO BOARD OPTIONS
EXCHANGE, INC.; AMERICAN
STOCK EXCHANGE, LLC;
PHILADELPHIA STOCK EXCHANGE,
INC.; PACIFIC EXCHANGE, INC.;
CBOE LESSORS’ ASSOCIATION;
DONALD PHILLIPS; MICHAEL
MONDRUS; and LAWRENCE BLUM;

wee ewer ewer

Defendants.
MEMORANDUM OPINION AND ORDER

Plaintiffs, Michael Kundrat (“Kundrat”), Stanley Awdisho (“Awdisho”), and Kevin Ryan
(“Ryan”) (collectively “Plaintiffs”), filed a six-count amended complaint against Defendants, the
Chicago Board Options Exchange, Inc. (“CBOE”); American Stock Exchange, LLC (“AMEX”); the
Philadelphia Stock Exchange, Inc. (“PHLX”), the Pacific Stock Exchange, Inc. (“PCOS”)
(collectively “the Exchange Parties”), CBOE Lessors’ Association (“CBOELA”); Donald Phillips
(“Phillips”), Michael Mondrus (“Mondrus”), and Lawrence Blum (“Blum”). The complaint alleges
violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78) (2002), and Rule
10b-5, 17 C.F.R. § 240.10b-5 (2002) (Count J); the Clayton Act, 15 U.S.C. § 12 et seg. (Counts IE

and IV); and breach of contract (Count II) by the Exchange Parties. The complaint also alleges

3\


Plaintiffs’ brief in opposition to the Exchange Parties and Blum’s motion to dismiss indicates that
Plaintiffs intend Count VI to allege a group boycott in violation of § 1.

In order to state a claim for a private antitrust action, Plaintiffs must allege “‘(1) a duty
recognized by the antitrust laws; (2) a violation of the antitrust laws; (3) injury to an interest
protected by that antitrust laws and attributable to the antitrust violation — that is, antitrust injury; and
(4) a direct link between the antitrust violation and the antitrust injury, that is to say, standing.””
Cathedral Trading LLC y. Chicago Bd. Options Exch., No. 01 C 3456, 2002 WL 825758, at *5
(N.D. Ill. Apr. 30, 2002) (quoting Greater Rockford Energy & Tech. Corp. v. Shell Oil. Co., 998
F.2d 391, 395 & n.7 (7th Cir. 1993)). “[T]o be per se illegal, a boycott must have two essential
elements: (1) at least some of the boycotters were competitors of each other and the target, and (2)
the boycott was designed to protect the boycotters from competition with the target.” Cathedral
Trading, 2002 WL 825758, at *6. Here, Plaintiffs are customers of Defendants, not competitors.
Thus, the boycott could not have been designed to protect CBOE, CBOELA, Phillips, Mondrus, or
Blum from competition with Plaintiffs. Therefore, Plaintiffs have not established that the alleged
boycott is per se illegal, and there has been no violation of any duty recognized by the antitrust laws.

Even if the boycott is analyzed as a vertical restraint, that is, involving an agreement between
participants at different levels of distribution, on trade under the Rule of Reason, Plaintiffs still
cannot state a claim for violation of § 1. Under the Rule of Reason analysis, Plaintiffs must allege
that the challenged restraint adversely affected competition in the relevant market. 42nd Parallel
North v. E Street Denim Co., 286 F.3d 401, 404 (7th Cir. 2002). To show that the restraint adversely
affected competition in the market of options trading, Plaintiffs must allege that the CBOE,

CBOELA, Phillips, Mondrus, and Blum have market power, that is, CBOE and the others “can raise

-12-


and (5) damages. Cook v. Winfrey, 141 F.3d 322, 327 (7th Cir. 1998).

Count V alleges that CBOE leamed that Plaintiffs were earning substantial profits from
trading; that CBOE attempted to bar Plaintiffs from the Exchange Parties’ markets by imposing
severe reporting requirements on Plaintiffs’ clearing firms; and CBOELA, through Phillips,
Mondrus, and Blum, used its influence with CBOE to compel CBOE to deliver a “blacklist” letter
to Plaintiffs’ clearing firms, thereby inducing the clearing firms to close Plaintiffs’ accounts. (Am.
Compl. {¥ 50, 52, 53, 54.) The “blacklist” letter accused Plaintiffs of potential trading abuses. (Am.
Compl. 51.) These allegations adequately plead a tortious interference with contract claim.

CBOE, CBOELA, and Blum’s argument that Count V is barred by the doctrine of regulatory
immunity is unpersuasive. At this stage in the proceeding, it is unclear whether CBOE, CBOELA,
and Blum were acting under the aegis of the Exchange Act’s delegated authority. Therefore, their
motion to dismiss is denied with respect to Count V with leave to reassert this argument at a later
time.

CONCLUSION

For the reasons stated herein, Defendants’ Joint Motion to Dismiss is granted in part and

denied in part. PHLX’s Motion to Dismiss Counts I and II is denied.

IT IS SO ORDERED.

Johh W. Darrah, Judge

United States District Court
Date: 200 2.

-15-